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Beyond Greece, Eurozone Has Other Achilles’ Heels

April 29, 2010 14 comments

By Marquis Codjia

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The current brouhaha over Greece’s budgetary mischance and its alleged adverse effects on Europe are an epochal episode in the history of the emergent European economic zone, but these are not the decisive areas where decision-makers, including political leaders and financial markets participants, should pay heed.

Greece’s debt pains would ultimately be resolved, because Eurozone behemoth Germany will strategically come in line with its continental peers; also, supranational channels – such as the European Central Bank and the IMF – will be coerced into using their balance sheets to provide liquidity to cash-strapped Hellenes.

The real fear presently is contagion – avoiding that the ambient financial pandemonium metastasizes into other economically comatose countries within the union. If any of these countries, clustered under the unflattering acronym of P.I.G.S. (Portugal, Italy, Greece, Spain), is downgraded by rating agencies – as was recently the case for Spain and Portugal who lost a few notches, the potential bailout costs and risk premia will rise stratospherically.

Eurozone leaders should swiftly settle Greece’s problems because of perception risks. No doubt the country is a financial and geostrategic dwarf (2% of Eurozone GDP and no major federal institution headquartered). Plus, other ‘weakest links’ such as Spain and Italy possess far greater self-financing capacities and have a different debt structure (domestically held vs. 95% of Greek debt held by foreigners). Notwithstanding, if trans-European perception is that Eurozone will not show geo-economic solidarity vis-à-vis its members in times of uncertainty, then the concept of political union loses its relevancy, and economic agents, including financial markets, will certainly reflect their despondency by driving the single currency lower.

Broadly, other systemic inefficiencies continue to thwart progress within the Eurozone.

First is the lack of a clear political structure in the federation. European leaders, particularly those from prominent countries (UK, Germany, France), seem at this point more content with a federal hierarchy replete with political figures (preferably from minor countries) who pose no leadership threat to them, and a plethora of bureaucratic institutions filled with functionaries picked on an unwritten pro-rata rule to satisfy member states. This strategic stance of an elusive political union grounded in an economic zone is antithetical to the very concept of federation that subtended the initial EU agreement.

To illustrate this, let’s consider a simple example: whom would current U.S. President Barack Obama or China Premier Wen Jiabao negotiate a strategic partnership with if either leader needs a European counterpart? Would they call upon the current President of the European Commission José Manuel Durão Barroso? Or the current President of the European Council Herman Van Rompuy? Or the current (6-month rotating) President of the Council of the European Union José Luis Rodríguez Zapatero? Or EU heavyweights French President Nicolas Sarkozy or German Chancellor Angela Merkel? Or a combination of all of these leaders?

Second, the lack of a clear, single political leadership begets an absence of a uniform socio-economic agenda in the union. It seems as though European leaders want the pros of economic integration, but abhor its cons altogether without attempting to minimize or obliterate them. EU citizens must define what the Eurozone stands for: is it a free-trade area, similar to NAFTA (North American Free Trade Agreement) or ECOWAS (Economic Community of West African States), where partner countries retain their political, economic and social independence, and can compete against each other? Or is it a political and economic union steered by broadly uniform national social policies, similarly to a single country? Or is it, rather, something in between, or neither?

Third, European Central Bank’s powers must be broadened beyond price stability. Unlike the U.S. Fed, the bank’s only primary mandate at the moment is to keep inflation low, with other objectives subordinate to it. The ECB should intervene further in the regional economy, and help avoid systemic disequilibria if need be. In sum, the institution should be allowed to use its gigantic reserves to calm jittery markets in times of uncertainty, among other roles.

Fourth, Eurozone membership should be reviewed; this includes not only the admission process, but also membership conditions and stipulations for exclusion. Understandably, the political undertones of this process call for some diplomatic verbiage, but overall, countries seeking membership in the privileged “Club Euro” must meet stringent criteria, and such criteria should be thoroughly enforced. The current Stability and Growth Pact, which aims to limit budget deficits and debts, is a good start but the ineffective control scheme around it permitted the kind of statistical fraud that Greece authored when seeking admission nearly a decade ago. In sum, sound economic fundamentals and strict governance rule, in addition to geography, should be the rationale for co-opting new members into the Eurozone.

Finally, the EU enlargement process should pay special attention to two key dossiers: U.K. and Turkey. The argument here is not in favor of a quick admission (in Turkey’s case), but for a clearer acceptance framework, more effective than the current 31-chapter “Acquis Process”.

Both dossiers are complex and politically charged, but their quick resolution will do more good than harm to the EU. Turkey has many woes (human rights concerns, Cyprus dispute, perception of Islamism despite the country’s secularism, business regulation, etc.), but its advantages are also interesting. It is 16th largest GDP in the world – per IMF’s 2009 ranking, outpaced in the Eurozone only by Germany, U.K., France, Italy and Spain. This means that, out of the current 27 EU members, it ranks 6th on GDP measurement. The country is geographically larger than any EU member and its ca. 73 million citizens are outnumbered only by Germany’s ca. 82 million; this may open up potential new markets for growth-seeking EU businesses. Politically, Ankara is an important geostrategic ally of the West and a member of such key organizations as G-20, OECD and NATO.

As for the U.K., a current EU member that opted out of the Eurozone, its Labor Party-led government defined in the late 1990s five economic tests that must be met prior to adopting the Euro as national currency, either via parliamentary ratification or referendum. Euro adoption remains a domestic hot button issue and thus may not be addressed for many years. But, it’d be interesting to see how politicians and business leaders will react once the euro reaches parity with, or gradually outpaces, the pound sterling. So far, the euro has risen 65% vs. the pound, from a low of 57 cents in 2000 to 94 cents a decade later, briefly nearing parity late in 2008 (.98 in December 2008).

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L’Allemagne et son casse-tête grec

February 10, 2010 14 comments

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L’atmosphère ces dernières semaines à 1, Willy-Brandt-Straße à Berlin est des plus tendues. Le siège de la chancellerie allemande, l’un des plus grands édifices de pouvoir exécutif au monde – 8 fois la taille de la Maison Blanche – fourmille de milliers de fonctionnaires affairés sur les sujets graves de l’heure, du taux de chômage galopant à la relance économique en passant par la lutte contre l’évasion fiscale.

Cependant, la question qui préoccupe le plus Angela Merkel, la chancelière allemande et ses proches conseillers est relative au chaos financier en Grèce et ses conséquences pour la zone Euro.

Vu la solidité de ses fondamentaux économiques, son excellente côte chez les agences de notation, et une discipline dans la gestion des deniers publics digne des préceptes des plus grands stratèges de la Wehrmacht,  l’Allemagne a pu mieux résister à la crise que d’autres pays de l’Union.

Berlin n’est pas seulement la première puissance de l’Europe à bien d’égards ; elle en demeure essentiellement sa locomotive économique. Cette position lui pose un dilemme parce que sa dépendance envers les autres pays de l’Union (pour ses exports) et l’absence de barrières douanières (Accord de Schengen) la forcent à venir en aide à ceux-ci.

En clair, l’Allemagne doit « insuffler » son Plan Marshall aux ventres mous de la chaîne économique de la fédération si elle ne veut pas elle-même en pâtir à terme.

Angela Merkel et son ministre des finances Wolfgang Schäuble sont longtemps restés rétifs à une implication plus profonde de Berlin pour aider les économies handicapées de l’Union. Ils estiment fermement que certains de leurs voisins utilisent l’Europe comme bouc-émissaire à leurs problèmes internes.

Cette méfiance explique leur choix de ne pas utiliser la Banque Centrale Européenne et la Bundesbank comme bailleurs de fonds principaux, leur préférant le FMI et d’autres canaux transnationaux de sorte à repartir les risques sur une plus grande plateforme d’acteurs financiers et de pays.

Il faut dire que la Grèce n’a pas été ces derniers temps un modèle de gestion économique aux yeux des observateurs allemands et des marchés financiers. Loin d’etre un nain géostratégique comme l’Islande, la Grèce une solide économie (essentiellement basée sur le tourisme et le secteur maritime) classée 26ème sur la liste du FMI (PIB/pays en 2009).

Mais le fait surréaliste est que le pays, dirigé à l’heure par le premier ministre gréco-américain Geórgios Papandréou, a été reconnu coupable de falsifications statistiques de ses comptes lors de son entrée dans la fédération européenne.

L’exécutif hellène doit prendre à bras le corps le problème du déficit public et du service de la dette, et les programmes d’austérité fiscale ne manqueront pas d’augmenter les mouvements sociaux dans les mois à venir.

D’autres pays du vieux continent présentent un pronostic similaire, et se regroupent sous l’acronyme anglais non plus génuflecteur de P.I.G.S. (cochons). Ces pays sont le Portugal, l’Italie, (la Grèce), et l’Espagne ; ils ont aussi des économies minées par la chute du marché de l’immobilier, le chômage grimpant, le tissu industriel émietté et les délocalisations massives des firmes privées.

Les autorités européennes réagiront à coup sûr pour éviter un effet boule de neige potentiellement délétère au reste de l’Europe. Beaucoup d’options s’offrent à elles, de l’aide directe de la BCE à la Grèce à un rachat partiel de la dette grecque par la BCE en passant par des subventions de structures transnationales comme le FMI et une augmentation des mesures protectionnistes pour arrêter l’hémorragie économique pendante (ex. : guerre des chaussures avec la Chine).